RESEARCH IT!  >>  IPO BUZZ!

 

CMC Limited

 Issue Summary
  • Type
  • Public issue
  • Min. subscription
  • 10 shares
  • Size
  • Rs 1,852.5 m
  • Lead Managers
  • HSBC Securities, Enam Financial
  • Price
  • Rs 475
  • Listing
  • BSE and NSE
  • Face value
  • Rs 10 per share
  • Promoters
  • Tata Sons Limited
  • Shares on offer
  • 3.9 million
  • Promoters post
        issue holding
  • 51.3%
  • Issue Opens
  • February 23, 2004
     
  • Issue Closes
  • February 28, 2004
     

     Issue structure

     Background
     
  •  
  • Business
     

    The business of CMC is organised around four strategic business units (SBUs). The first is the Customer Services Division, where the company provides services like infrastructure development and management, networking management, third party maintenance and networking consultancy. The Systems Integration Division is involved in activities like software development, maintenance and systems consultancy. The ITES Division has offerings like data management services, facilities management, web design, hosting and electronic data interchange (EDI). Finally, the Education & Training Division offers courses in IT through the company's own and franchisee centres.

    CMC's revenues and profits have grown at CAGR of 15% and 46% for the period FY99 to FY03. Some of the key projects the company has been involved in the past include BOLT (for BSE), FACTS (a fingerprint identification system) and IMPRESS (ticketing and reservation system for Indian Railways).

     
  • Promoters
     

    CMC was initially promoted by the Government of India (GoI) in 1975. Then in 2001, the government divested 51% of its shareholding to Tata Sons Ltd (TSL). TSL later acquired 0.12% of the shares in the company and now has the management control. At present, the GoI holds 26.3% of the company's share capital.

    The present promoter, TSL, is the principal investment holding company of the Tatas. The principal business of TSL is investment holding, consultancy services in finance, computer software, business operations and management, economic and market research and quality assurance. TSL has the following four operating divisions:

    • Tata Consultancy Services,
    • Tata Economic Consultancy Services,
    • Tata Financial Services, and
    • Tata Quality Management Services
  • Sector
     

    The Indian software sector, over the past couple of years, has been facing pressure of slowdown in the global technology spending. While corporations around the world (especially in the US) reduced their IT budgets, there has been a downward pressure on billing rates as well. However, this slowdown has presented companies in the Indian software sector with a huge opportunity on the outsourcing front, the market for which is expected to grow at a CAGR of over 50% through 2008 (NASSCOM-McKinsey estimate). As a matter of fact, despite this downturn, the Indian software industry grew at an average rate of 26%-28% p.a. Even for FY04, while NASSCOM has projected a 26% growth for the sector, there is a big possibility of this target being overshot. This is because the momentum towards outsourcing is gaining ground. Indian software companies therefore, can hope for increased business.

    As for the domestic market, this was estimated to be around Rs 88 bn in FY03. Out of this, systems and network integration services constitute to around 29%, with the remaining contributed by customized software development (22%), consulting (13%), third party maintenance (12%), IT-enabled services (11%) and systems and facilities management (13%).

     Reasons to apply

  • Track record of having managed complex projects:  CMC, in the past, has been involved in a number of comprehensive, groundbreaking projects. Some of these are BOLT (for BSE), FACTS (a fingerprint identification system) and IMPRESS (ticketing and reservation system for the railways). IMPRESS caters to the needs of around 10 m passengers everyday over 6,000 passenger trains and covering a network of 800 railway stations across the country. This is indicative of the company's ability in managing large and complex projects and its understanding of domains. Considering the increase in budget allocations by Indian Railways on technological upgradation, CMC as a dominant player, is likely to benefit in the long term. Besides, the BSE also has plans on the BOLT front.

     
  • End-to-end service provider:  CMC has moved on being a hardware maintenance company to becoming an end-to-end solutions provider. This includes software development and maintenance, ITES, systems integration and package implementation. The market for these services, especially the last three, are growing rapidly as customers globally are vying to become more efficient by integrating their existing systems rather then spending on building up new ones. Also, CMC has been leveraging the brand name and reach of its Group Company, TCS. This has helped it in penetrating global markets, which it had never done as a public sector undertaking.

     Reasons not to apply


  • High dependence on government contracts:  CMC is dependent for almost 67% of its revenues from government clients and this is a big cause of concern. Over that, the preferential treatment given by the government to CMC in the competitive bidding process (tenders) has ceased. The company had enjoyed this benefit for two years after the government divested its 51% share to TSL in October 2001. Also, since projects from the government are based on a competitive bidding process, there is no assurance of repeat business for CMC. This is likely to affect the company's growth.

     
  • Increasing levels of attrition:  CMC, which enjoyed comparatively low attrition levels in FY02 and FY03, has seen these levels rise to around 12% for the nine-month period ending December 2003. In these times of increasing global competition in the technology sector, attracting and retaining key employees holds immense significance in the long-term. While the current attrition rate of CMC is low as compared to the industry average of 16%-18%, the company needs to put a clear strategy in place to save this rate to rise further. Also, as seen from the graph below, CMC's employee costs per employee is among the lowest in the industry. Thus, in order to retain employees, the likely increase in staff cost could impact operating margins going forward.


    * Includes salaries, bonuses, staff welfare costs, etc.

     
  • Challenges in scalability:  Since its incorporation in 1975, CMC has grown to a size of just 3,024 employees (as on January 1, 2004). This is miniscule when compared to the base that relatively newer companies like Infosys (23,000+) and Wipro have built over the years. One reason for this can be attributed to the nature of business (maintenance) the company was involved in earlier times. However, now as the company focuses on the software services market, it is likely to lag way behind the domestic software major that have scaled up tremendously in the recent past. And this would then mean high capital expenditure, challenges in growing as well as retaining employees, improving client satisfaction and preserving the company culture.

     Financial Performance

     Shareholding

     Comparative valuations and comments

  • CMC's valuation, despite the company' unimpressive growth record of the past, is currently at the higher end of the spectrum. Also, the company's operating margins are less than a quarter of the second largest software exporter from the country, Infosys. While the company has traditionally focused more on providing facilities management and maintenance services to its clients, this seems to be shifting now towards other IT services like software development, ITES and systems integration. This transition is likely to bring along with it a whole host of challenges like increased attrition, staff cost increases and managing growth. On the positive, this move could improve the overall margins in the long-term, provided the company exploits the synergies with the Tata Group.

    Considering the fact that the management is yet to test global markets in a meaningful way, the risk profile of the stock is on the higher side. On a relative basis, considering the already high valuations and poor return ratios, there are better investment opportunities available in the software sector basket.

  • Your feedback is important to us!
    Tell us what you think of this analysis.
    Name
    E-mail
    Your comments